THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

WOLF BLITZER, HOST: T.J., thanks very much.

Happening now: a frantic race against the clock. Just seven hours from now, the government will officially shut down if -- if -- the escalating political battle between Democrats and Republicans can't be solved. Ahead, the latest on the talks from two key lawmakers.

Also, a women's health organization now caught in the middle of a fiery debate. What is Planned Parenthood? What percentage of its services actually involve abortions? We're digging deeper.

And NATO on the defensive in Libya, refusing to apologize to angry rebels for what's said to be a deadly friendly fire attack.

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

ANNOUNCER: This is CNN breaking news.

BLITZER: We begin now with the breaking news.

Time is running out before most federal government services are set to come to a screeching halt, leaving hundreds of thousands of Americans, including all U.S. military personnel, without a paycheck.

This hour, the wheels are already in motion at government offices around the country. Contingency plans are being sent out indicating which employees will be affected and the procedures that will be followed by a shutdown, if it occurs. Be sure to check out the bottom of your screen, where you'll see an updated list of the agencies, the services that will be impacted.

Meanwhile, as the clock ticks, Republicans and Democrats are stepping up the war of words and they're passing the political blame.

(BEGIN VIDEO CLIP)

REP. JOHN BOEHNER (R-OH), SPEAKER OF THE HOUSE: I'm also hopeful that we'll be able to come to some agreement, but we're not going to roll over and sell out the American people, like has been done time and time again here in Washington. When we say we're serious about cutting spending, we're damn serious about it!

SEN. HARRY REID (D-NV), MAJORITY LEADER: They can keep their word and significantly cut the federal deficit, or they can shut down the federal government over women's access to health care. If that sounds ridiculous, it's because it is ridiculous.

(END VIDEO CLIP)

BLITZER: Let's go over to the White House. Our correspondent Dan Lothian is standing by. All right, so what is the president doing with only hours away to avert a shutdown that would affect millions and millions of Americans?

DAN LOTHIAN, CNN WHITE HOUSE CORRESPONDENT: Well, Wolf, first of all, I can tell you that a source here at the White House says that they're more optimistic now than they were four hours ago that a deal will get done.

Now, behind the scenes here today, behind closed doors, White House negotiations -- negotiators have been working very hard to nail down a deal. The president has been making phone calls. He spoke to Speaker Boehner, also Majority Leader Reid earlier today. But I can tell you that that has not been his only focus. I'm told that he's also been dealing with other domestic issues, as well as national security. But clearly, this is the big crisis for the administration as they try to work against this clock that is ticking down to a government shutdown.

Behind the scenes, there's also some frustration here that a deal has not gotten done and that this level of rhetoric has been ramped up, a lot of finger pointing and a lot of confusion, Americans out there uncertain what story to buy because you're hearing different stories from Republicans and Democrats. So the hope here is that everyone can get on the same page and nail down a deal before this deadline expires.

Meanwhile, the president was expected to go out of town this weekend with the first family to Colonial Williamsburg. It was a weekend getaway. That trip has been postponed so that the president can focus on these negotiations, Wolf.

BLITZER: If they are this close, Dan, to a deal and you're saying they're a little bit more optimistic now than they were only a few hours ago -- if they're so close, I assume the president would do now what he said earlier in the week he wouldn't do, sign some sort of what they call continuing resolution, a temporary bill that would allow the government to stay in business for a few more days, give the negotiators a few more days to resolve this so that the American people don't suffer. Are you hearing the White House would do that?

LOTHIAN: That is still what we're hearing from aides, and certainly, the president has pointed that out, as well, that this deal did not have to get done but that they had to reach some kind of an agreement, that he would support a stopgap measure of two to three days so that they can finalize that deal, have some money to keep the government running, Wolf.

One other thing I should add is that depending on what happens tonight, we're hearing that there's a very good chance that the president -- we'll hear from the president sometime tonight. As you know, over the last couple of nights, the president has come into the briefing room to sort of give us an update on where the negotiations are.

So again, hearing from a source here at the White House that there's a good chance that we'll hear from the president sometime today.

BLITZER: I'm sure we will. We'll be hearing from the president of the United States. Of course, we'll have his comments live here on CNN. We'll stand by for that.

Let's go to the other end of Pennsylvania Avenue right now. Our senior congressional correspondent, Dana Bash, is standing by. All right, they're a little bit more optimistic at the White House now, you just heard, Dana -- you just heard Dan Lothian say it -- than they were four hours ago. What about Democrats and Republicans on Capitol Hill?

DANA BASH, CNN SENIOR CONGRESSIONAL CORRESPONDENT: They're more optimistic. The deal is not done yet, according to sources on both sides of the aisle, both side of the Rotunda that I talked to just before coming here to talk to you, Wolf. But it definitely does -- you get the feeling in talking to sources who are working on this, lawmakers who were having votes on the floor and just talking to their colleagues and talking to the leadership, that things are getting closer.

Now, earlier today, we did hear from the Democratic leader, the Senate majority leader, Harry Reid, that there actually is a deal on the number to cut, $38 billion. And even though the House speaker, John Boehner, said that there is no deal on the numbers, we are hearing from GOP sources that that is about right.

Having said that, you know, it does seem like the level of spending has not been the issue. The issue still has been what are they going to cut. And boy, if you listen to Democrats, as you played earlier in the program, they are pressing hard the idea that they believe that the outstanding issue is not related to spending directly but on women's health.

BLITZER: How do they finesse that issue, if, in fact, that's the single remaining issue, as Harry Reid keeps pointing out, the funding for Planned Parenthood and some of the other women's organizations under what's called Title X -- how do they finesse that, given the strong opposition of so many conservative Republicans, including a few Democrats, to any funding directly and even indirectly -- obviously, federal law has prevented direct funding for abortion -- abortions in the United States for decades. But how do they finesse this indirect funding issue?

BASH: It's a good question. I've actually talked to a couple of conservative lawmakers, social conservatives, as well, who've actually told me that they don't think that that is something that their leadership -- that Republicans should hold out for, that the spending dollars are more important, which is may lead us to see some kind of agreement on that issue.

It certainly is an issue for many, and there are many Republicans who say, We're not going to vote for this with that. But the bottom line is that it's coming up to the end of the day.

But on the Democratic side, I think what has been most fascinating, Wolf, to watch all day long is the way that Democrats (INAUDIBLE) give them credit. They have been remarkably on message, pounding away, saying that this is just one issue, women's health. It is in their political interest to do this. They actually -- the Senate Democrats even sent out a fund-raising issue on this issue, saying Republicans are holding up the government, they are going to potentially shut down the government for one what they call extreme issue on women's health and by extension abortion.

And this is something that Democrats feel that they really have the upper hand on, and that is why the only thing that we've heard from the House speaker all day to try to deflect that is to say, No, no, no, it isn't just about that. It's about spending.

And I can tell you that talking to Republicans who are working on this, they insist that there are some spending issues that they still have to work out. But again, big picture, sources on both sides say that they're getting closer, but they do -- I can agree with what Dan said, that they do say that even if they come to a deal in the next few hours that they probably will have to pass a short-term measure to keep the government running for a few days while they work out the logistics of passing that for the rest of the year.

BLITZER: Yes, whatever the procedure is, the American people want to make sure the services, the paychecks continue to go, whatever the legislative format, how they do that. That's not that important because if there's a will, there's certainly a way. Dana, stand by.

I want to dig deeper now on that issue that Democrats say at the heart of this political fight. We're talking about women's health, specifically funding for the organization Planned Parenthood. Our Lisa Sylvester has been asked by all of us to take a closer look at what this organization is all about and why it's now at the center of this controversy. Lisa, what are you learning?

LISA SYLVESTER, CNN CORRESPONDENT: Well, Wolf, we'll take a look at the numbers. Planned Parenthood receives about $360 million in federal funds every year. But when you compare it to the entire federal budget of $3.5 trillion, we're talking about .01 percent at stake. But Republicans say this isn't about just money, it's also about morals.

REP. MICHELE BACHMANN (R), MINNESOTA: There's a lot of people that have moral problems with that and I think it's difficult to force people to violate their conscience to send that money to Planned Parenthood.

SYLVESTER: But since 1976, it's been illegal for Congress to provide funding to clinics and hospitals for abortions. Groups like Planned Parenthood do receive federal funding, but specifically for other women's health services, like cancer screenings, HIV tests and pap smears. The issue is whether that money, known as Title X, funding should be stripped, which would mean a $300 million loss for Planned Parenthood and other women's health care centers. Add to that what the group is calling misinformation from Republicans, like Senator John Kyl.

SEN. JON KYL (R), ARIZONA: If you want an abortion, you go to Planned Parenthood, and that's well over 90 percent of what Planned Parenthood does.

SYLVESTER: False, says Planned Parenthood. They say only 3 percent of their services involve abortions. Ninety-seven percent is for women's services, providing one million cervical cancer screening a year, 830,000 breast exams and nearly four million tests and treatments for sexually transmitted diseases.

But Republicans argue the money is fungible, that if Planned Parenthood receives reimbursements from the federal government for, say, cancer screenings, that frees up money for the organization to use on abortion services. I sat down with the head of Planned Parenthood and asked her about this.

(on camera): Is there a firewall in place between the money that you receive from Congress for health care services and the money that is spent on abortions?

CECILE RICHARDS, PLANNED PARENTHOOD: There's a very strict firewall, always has been for decades.

SYLVESTER: Are there audits?

RICHARDS: Absolutely. The federal government is -- you know, very strictly audits how their -- how their dollars are used, as they should be.

(END VIDEOTAPE)

SYLVESTER: Now, Planned Parenthood says if they lose their funding, it will be poor women in rural and urban areas who suffer the most because they won't have access to basic preventive care like cancer screenings, and over the long haul, that it could cost taxpayers more to foot the bill for more serious illness -- Wolf.

BLITZER: Thanks very much, Lisa Sylvester. Good report.

Part of the escalating budget battle on Capitol Hill comes down to just a small percentage of money. So why are both sides fighting so hard right now? We'll have complete analysis. And thousands of protesters crowding Egypt's Tahrir Square once again, only weeks after that historic revolution. What's behind the new arrests -- unrest today? Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Let's get rich back to the budget crisis on Capitol Hill. With less than seven hours to go before a potential government shutdown, the escalating rhetoric between Democrats and Republicans intensifying.

(BEGIN VIDEO CLIP)

REID: Republicans are asking me to sacrifice my wife's health, my daughters' health, and my nine granddaughters' health. They're asking me to sacrifice the health of women in Nevada and all across this country. Mr. President, I'm not going to be part of that. I won't do it. As a legislator, I'm very frustrated. As an American, I'm appalled. As a husband, a father and a grandfather, I'm personally offended.

BOEHNER: These discussions continue to be respectful. We continue to work together. Most of the policy issues have been dealt with, and the big fight is over the spending.

BLITZER: You heard one side say they've reached an agreement over the money, it's the technical issue --

BORGER: Right.

BLITZER: -- about funding for Planned Parenthood, for example. That's the core. The other side, you know, disagrees.

BORGER: Well, the other side says it's about the money and that they hadn't reached an agreement. And Harry Reid said, yes, they had reached an agreement. And look, we're not inside the room. There are very few people inside the room. It's kind of a blackout. They're actually negotiating without a lot of staff there, which is probably a good thing.

But in the end, I think, Wolf, right now, it's gone up to the end, and both sides have to look for a way to save face right now because I think the American people are taking a look at this and going, You know what? This is no way to run a government.

BLITZER: Neither side's going to win on this. And the only real losers -- the real losers are going to be the Democrats, the Republicans, the president will lose, but the American people will lose also.

CANDY CROWLEY, CNN CHIEF POLITICAL CORRESPONDENT: Well, sure, if it goes on for some, you know, huge length of time. Mostly, it will be the federal employees who get sort of the first hit, or if you want a passport or that kind of thing.

But look, there's what these two are saying in front of the microphones, and then there's what these two are saying to one another. I think Harry Reid is quite cognizant of the kinds of things that John Boehner is up against. John Boehner has to be able to go back and say to his right wing, his Tea Party folks, I got as much as I could possibly get. I took them right up to that final moment. Harry Reid has to say, I tried to hold onto this or that. I did my very best.

So they have -- you know, there are different constituencies at play here, including the voting public. So I think, you know, the signal we're getting certainly at this point is they will certainly work something out. And let's remember, every single one of those Tea Party-backed candidates now in the House that can give John Boehner so much trouble can vote against it and they could still get it passed if they had enough Democrats. So it's not this sort of, Oh, my gosh, it's going to fail if we put it on, it's, like, What can you sell back in your caucus?

BLITZER: But John Boehner doesn't want his Republican caucus in the House of Representatives split between the Tea Party movement on the one hand, the more moderate Republicans on the other hand, and then the Democrats will come and save this legislation. He wants that Republican Party united.

JESSICA YELLIN, CNN NATIONAL POLITICAL CORRESPONDENT: As much as it possibly can be. But at some point, he's going to have to accept that he's going to likely lose some of those Tea Party activists because to get this passed at this point, he has to compromise and give up some of what the Tea Party wants to cut a deal with the Democrats. That's one of the reasons, it would seem, that they're holding onto these some of these issues like Planned Parenthood to at least retain social conservative Republicans, social conservative maybe Democrats, who would make up for some of the losses of the Tea Party.

The other thing to talk about is the president here because, you know, he is the one who came into office promising to end gridlock in Washington, and even though he doesn't get to vote on this, per se, if he can't solve this problem, it doesn't help him look strong.

(CROSSTALK)

BLITZER: David Gergen is here, as well. Let me just bring him into this conversation. David, they seem so, so close. You heard Dan Lothian, our White House correspondent, say they're more optimistic now than they were four hours ago. Dana Bash on Capitol Hill is hearing the same thing. The president, we suspect, is getting ready to address the nation. They're tantalizingly close to a deal. They can resolve this if there's some good will. DAVID GERGEN, CNN SENIOR POLITICAL ANALYST: I think they're almost there. What I'm hearing is about $38 billion worth of cuts and that they've dealt with the social issues. They've -- as one source said, they turned the social issues into speed bumps, not major barricades.

But I do agree with the tenor of the conversation. I've just come from an international gathering, and I can tell you this has not only been, I think, discouraging for Americans but it's been an international embarrassment. People are looking at us and saying, What in the world is going on with you folks over such a small amount of money? And rather than sort of giving us a sense of encouragement about the fights ahead, I think, actually, it's deepened some of the divisions for the fights ahead.

BORGER: You know, I think this, in many ways, is all about how John Boehner is going to be perceived by his caucus. You know, this is an important test for the new speaker, and what you see is a speaker who's going into these meetings and -- by the way, I think he has a pretty decent relationship with Harry Reid -- and going back to his caucus and trying to get every dollar he can out of the Democrats because that's what he's been tasked to do.

But in the end, he may lose a lot of those freshmen Republicans. My magic number is 34 -- 34 of the 87 freshmen Republicans have never held elective office before. They don't know what it was like in 1995.

BLITZER: And Karl Rove, who does know what it was like in 1995 -- he wrote a piece to other Republicans saying, You know what? Be careful because you could strengthen President Obama going into his reelection campaign, just as Bill Clinton was strengthened by the first shutdown in '95 going into his reelection campaign in '96 against Bob Dole. We know what happened then.

Guys, stand by. One shocking consequence of a government shutdown, families of service members killed in the line of duty won't receive death benefits. Will troops also lose their pay? Stand by.

And find out what Senator Mark Warner of Virginia got caught doing on the Senate floor.

(COMMERCIAL BREAK)

BLITZER: We're awaiting word from the White House, from the leadership of Congress, whether or not there is going to be a government shutdown. Stand by. We're all over this story.

Other important news, though, we're following right now, including one of the company's biggest drug companies paying out $70 million to settle some bribery charges. Lisa Sylvester is monitoring that, some of the other top stories in THE SITUATION ROOM right now. What's going on, Lisa?

SYLVESTER: Hi, Wolf. Well, Johnson & Johnson reached a $70 million deal with the government today without admitting or denying guilt. The Securities and Exchange Commission had charged the pharmaceutical giant with bribing doctors in Greece and Poland to prescribe its drugs and medical devices. Johnson & Johnson also faced charges it paid kickbacks in Iraq to get contracts under the Oil for Food program.

A distressing and mystifying sight on the beaches of the Gulf of Mexico. Dead baby bottlenose dolphins have been washing ashore, and scientists don't know why. Since February of last year, more than 400 dolphins have been found stranded or dead. Researchers are not sure if there's a link to last year's BP oil spill, but a dead dolphin with oil on it was found just two weeks ago.

North central Arkansas just keeps shaking and rattling residents. Since yesterday there have been several earthquakes near the town of Greenbrier. The largest one measured 3.9 in magnitude. Hundreds of earthquakes have hit the region for months now, and some experts speculate that it's because of natural gas drilling. But last month's closure of two injection wells hasn't stopped the quakes.

And check this out. Look at what cameras caught Virginia senator Mark Warner doing today as he was presiding over the Senate. Seems like every time the cameras caught him, the Democrat was very busy autographing self-portraits or checking his BlackBerry. A little more light-hearted moment, you might say, on a tense day where everyone's waiting for a potential government shutdown, or at least to see what happens with that, Wolf.

We're watching the clock tick closer and closer to the government shutting down. What's keeping Republicans and Democrats from reaching a budget deal? We're standing by. We'll take a closer look.

And NATO vowed to protect Libyan civilians from attacks by Moammar Gadhafi. So why are some Libyans so furious right now with NATO over an air strike that went deadly wrong?

(COMMERCIAL BREAK)

BLITZER: Just about six-and-a-half hours from now, the federal government will close its doors, a White House source now saying, though, they feel a bit more optimistic about a deal than they did only four hours ago, that source also saying there's a good chance we'll be hearing from President Obama soon.

Let's discuss what's going on with two critical voices in the debate on Capitol Hill, the Democratic senator from Missouri, Claire McCaskill; the Republican Congresswoman from Tennessee, Marsha Blackburn.

Ladies, thanks very much for coming in.

Very quickly, first to you, Senator. Deal or no deal? What are you hearing? SEN. CLAIRE MCCASKILL (D) MISSOURI: Well, we hope -- we've -- we've agreed on a top line number. It appears that we hit a -- a bump on debating Planned Parenthood funding for health screenings and family planning services, which we were very confused about. We thought this was about spending.

But it appears that -- that perhaps it's -- that Speaker Boehner has gotten the support of his caucus and -- and we remain hopeful that -- that we will be able to reach this compromise.

But we went three quarters of the way toward the Republican position and that we can keep government running.

BLITZER: All right, what about -- what about that, Congresswoman?

Deal or no deal?

What are you hearing?

REP. MARSHA BLACKBURN (R), TENNESSEE: We are hearing that there is not a deal, that negotiations are still in process. And this is a debate about spending. And I would remind the Senator that the House, the Republicans in the House have sent over not once, not twice, not three times, but four times, options for the Senate to take up. And the Senate has not taken them up.

And, Wolf, we wouldn't be here in the first place if the Democrats had done the job that was there to do, to fund the government, when the fiscal year began October 1st.

BLITZER: Congresswoman, how far apart on the money are you?

BLACKBURN: I -- I don't know exactly how far apart the numbers are, but I can tell you this, we want to make certain that we cut billions now, so that we can get started on cutting trillions and start getting the fiscal house of this great nation back in order, because we have to be able to get ourselves to October 1st and then move on to the Ryan budget that was unveiled this week and put the process in place so that we are restoring fiscal sanity in this nation.

That means we're going to be cutting trillions.

BLITZER: So it's more -- and I want to bring Senator Murkowski back into this conversation.

But Congresswoman, as far as you know, then, it's not just the issue of funding for Planned Parenthood, there are substantive financial issues at stake right now, is that right?

BLACKBURN: This is about making spending reductions and getting this continuing resolution in shape. It's about making certain that our troops, many who are my constituents, who are currently deployed, are not going to be left in a position where they do not get paycheck -- BLITZER: All right --

BLACKBURN: We've sent these bills across to the Senate time and again and they're yet to send one back to us.

BLITZER: Senator?

MCCASKILL: We have, in fact, negotiated. I have pushed my caucus for more cuts. We have gone three fourths of the way toward the Republican position and that's why last night at the White House, Speaker Boehner indicated that top line number -- that we had gotten there, but there was still an issue about Title X, which is health services for women funding.

I've got to tell you, the reason we didn't get a budget last year is because Mitch McConnell objected in December, even though we had gotten to the number that he had requested of the Appropriations Committee, even though Republicans had stuffed that bill full of earmarks and helped write it.

And the other thing is that if this is about spending and we have come three fourths of the way toward the Republican position, then let's get this done.

Because you know what's insanity?

It's insanity that we would hurt our economy by shutting down the federal government tonight. We are in a fragile recovery and these --

BLACKBURN: Senator, I've got to tell you --

MCCASKILL: -- are real jobs --

BLACKBURN: -- if you send us something that we can take up, there, again, we have been sending these bills to you. You all did not do this before the fiscal year began in October. You didn't do it before you turned things over at the end of the year.

So we have taken it up and we are very serious about making the cuts that need to be made.

MCCASKILL: And I agree with you.

BLACKBURN: Whether it's billions now --

MCCASKILL: That's why we've made the cuts.

BLACKBURN: -- or trillions later. But the point is this, Harry Reid, if he decides he wants to shut the government down, he's going to shut it down. We have sent you four different options to send back to us. And to this date, the Senate has not sent anything back.

So we're waiting --

MCCASKILL: But the only thing I can --

BLACKBURN: -- to see if you all --

MCCASKILL: -- figure out --

BLACKBURN: -- are going to take it up.

MCCASKILL: The only thing I can figure out, Wolf, is that Speaker Boehner is not sharing with his caucus what the negotiations have been. I think that compromise has been reached. I think the spending cuts have been accomplished. We need to get this done so we don't hurt our economy and we make sure our troops get paid.

And then we need to move on to the really hard, hard discussion about what we do about our structural debt. Frankly, if we can't get a deal when we have agreed on a top line number before midnight tonight, then I can't really tell you that the Republicans are serious about deficit reduction. They may just want to be debating social policy.

BLITZER: Congresswoman --

BLACKBURN: No, we --

BLITZER: Let me just -- let me just ask you this -- a blunt question.

If there's a deal on the numbers, if John Boehner agrees on the number, the speaker of the House, Harry Reid, agrees, the White House agrees, but the -- the legislation includes funding for Planned Parenthood, will you vote yea or nay?

BLACKBURN: Wolf, we're going to be anxious to see what comes back to us --

BLITZER: What if it comes back to you --

BLACKBURN: -- and the Senate --

BLITZER: -- like that?

BLACKBURN: Let's see -- let's see what they bring back. And --

BLITZER: So you're open to voting for continued --

BLACKBURN: We --

BLITZER: -- funding for --

BLACKBURN: -- we want to see --

BLITZER: -- Planned Parenthood?

BLACKBURN: I think that what they tried to do is to bring the women's issues into this, the Planned Parenthood issues into this to take the focus off of the spending debate.

We have repeatedly tried to reduce what the federal government spends. Harry Reid would rather close the federal government and keep spending than to keep it open --

BLITZER: But --

BLACKBURN: -- and face the spending cuts.

So we're --

BLITZER: But it wasn't the Democrats --

BLACKBURN: -- we're waiting to see what they bring back --

BLITZER: -- Congresswoman, it wasn't the Democrats who raised the issue of Planned Parenthood funding, the Republicans wanted to eliminate it.

BLACKBURN: They -- the riders that have been included in that legislation are things that have been voted on several times before. Harry Reid has voted for them. The president has voted for them.

What they're trying to do is deflect attention and get it off the issue of spending, which is the debate --

BLITZER: All right --

BLACKBURN: -- that we're having.

MCCASKILL: I couldn't help -- I'll tell you how we get it off the issue. Let's put them aside. We can debate those issues another day. Let's get the spending cuts that we all want to reduce the federal spending and let's make sure that thousands upon thousands of private businesses and federal employees don't lose their paychecks and we do not need this kick in the gut to our economy right now.

If this is about spending, let's make the cuts. If this is about economy, let's keep the federal government open.

BLITZER: Senator McCaskill, thank you.

MCCASKILL: Thank you.

BLITZER: Congresswoman Blackburn, thank you, as well.

BLACKBURN: Thank you.

We hope they send something to us.

BLITZER: All of us hope they send something. The American people will suffer, first and foremost, if there's a government shutdown.

Six hours, 24 minutes remaining.

We're standing by. We expect to be hearing from the president, the Speaker. We expect to be hearing from the Senate majority leader. The negotiations, though, we're told, are continuing even at this movement. Meanwhile, other news involving Libya. Its opposition wants answers from NATO. For the second time, a coalition air strike apparently kills Libyan rebels. Will the deadly mistake sever ties between the alliance and many of Libya's people.

Plus, tens of thousands of Egyptians packed Cairo's famous Tahrir Square again today, and soldiers defy the threat of arrest to join them.

(COMMERCIAL BREAK)

BLITZER: We'll get back to the government potential shutdown shortly, but there is other important news involving Libya.

NATO now expressing remorse over a coalition air strike that went awry with deadly consequences. But the alliance is not officially apologizing.

Missiles struck their target, but it turned out to be a terrible mistake. Now several rebels are dead. Many Libyans are asking why.

CNN's Reza Sayah is in the rebel stronghold of Benghazi.

(BEGIN VIDEOTAPE)

REZA SAYAH, CNN INTERNATIONAL CORRESPONDENT: Friday prayers here in the opposition capital of Benghazi. Thousands gathered here to remember the rebel fighters killed in a NATO air strike on Thursday. NATO officials saying that these rebel fighters were killed somewhere between Brega and Ajdabiya, where we've seen fierce fighting between the loyalists and the rebels over the past week.

These rebels apparently were traveling in a tank. NATO officials saying they had no idea that the opposition forces had tanks, and that perhaps explains why they mistakenly targeted these opposition forces.

The incident on Thursday, fueling frustration here with NATO. The opposition still supports NATO, but you're starting to hear the opposition criticize NATO, and an operation that they call too soft and ineffective against Gadhafi's forces.

UNIDENTIFIED FEMALE: Not happy. Not happy.

SAYAH: Not happy with NATO?

UNIDENTIFIED MALE: We expect more from NATO. We thought NATO, they will finish everything within the week, you see.

UNIDENTIFIED MALE: When you (INAUDIBLE), OK, and we don't see any results.

SAYAH: Lots of gunfire here. This is how the opposition honors its fighters.

In response to the criticism by the opposition, NATO came out on Friday and restated its mission and its commitment to save civilian lives here in Libya. But the opposition says the only way you're going to save lives is with regime change, which is obviously not part of the U.N. resolution NATO is endorsing.

Reza Sayah, CNN, Benghazi, Libya.

(END VIDEOTAPE)

STOUT: And that was Reza a few hours ago. Reza is now joining us live from Benghazi, in eastern Libya.

Reza, I've got to say, you were pretty cool. They were shooting their guns in the air. You didn't flinch at all.

What was going through your mind during that report?

SAYAH: Well, I think I flinched definitely a few times, Wolf. But what's striking is the criticism that is growing among the opposition. And it signals potential problems in the relationship between the opposition and NATO.

And it's not difficult to see why problems could surface, because you have the international community, the U.N., NATO, with a stated goal of ending the bloodshed, ending the conflict, ending the loss of civilian lives. That could work if there was only one side fighting.

But here, you have a conflict not only with two sides fighting, but one side, the opposition, saying openly that they want to wage war. They want to continue to fight until the Gadhafi regime has been toppled.

So you have two objectives here, one with the rebels, one with the U.N., NATO, the international community, that obviously don't match. And that sets the stage for a lot of problems. And I think that's why, Wolf, you're seeing growing criticism from the opposition aimed at NATO.

BLITZER: Are a lot of people leaving Benghazi, heading in an eastward direction towards Egypt, because they are concerned that Gadhafi's forces could be on the move once again?

SAYAH: There are some people leaving Benghazi to the other rebel stronghold of Tobruk, but most people are leaving Ajdabilya, which appears to be the front line right now, a little west of Ajdabiya. It's a town of about 100,000 people, and there's reports that it's a ghost town right now.

Thousands of people leaving Ajdabiya, here, to Benghazi, and going to Tobruk. And that's because the Gadhafi forces are on a surge pushing rebel forces back west. So there is some concern here growing in Benghazi. And that's why, again, the criticism, being aimed at NATO for them to do something, and do something quickly.

BLITZER: A lot of concern right now.

Reza Sayah, reporting for us from Benghazi.

Reza, thank you.

Former U.S. congressman Curt Weldon, who joined me here in THE SITUATION ROOM yesterday, in Tripoli, is returning home from Libya. He didn't get what he went there for, a direct meeting, face to face, with Moammar Gadhafi.

In a statement released, Weldon said he's disappointed he did not sit down to a face-to-face meeting with Colonel Gadhafi, as promised, but he says he may have been able to get something even more significant, a path to a resolution, he says, of this conflict. He says, "Any time you're asked to play a part in advancing the cause of peace, there is a moral obligation to say yes."

We'll see what, if anything, emerges from his visit to Tripoli.

Meanwhile, today is a day of prayer across the Arab world, the Muslim world. It's exploded though into a day of protests and bloodshed.

In Syria, witnesses and medical sources tell CNN security sources fired on unarmed protesters in the city of Daraa. They say at least 22 people were killed. Syrian authorities say 19 soldiers died.

The United States is ramping up diplomatic pressure on Yemen's president to step down. Thousands of anti-government demonstrators rallied in the Yemeni capital and other cities. Medics say security forces fired on crowds with tear gas and live ammunition, killing two people, injuring at least 300.

In Egypt's capital, tens of thousands of people packed Cairo's iconic Tahrir Square. They want ousted president Hosni Mubarak to face trial. Egyptian soldiers defied the country's military rulers to join the protests in Tahrir Square.

Let's get some more now with CNN's Ivan Watson. He's joining us live in Cairo.

I didn't think we would be seeing these huge crowds in Tahrir Square again so quickly, but there are obviously a lot of angry people in Cairo.

IVAN WATSON, CNN INTERNATIONAL CORRESPONDENT: That's very true. And as you well put it, the Arab Spring, Wolf, has transformed a traditional day of prayer really into a day of protests.

And we saw crowds today that, possibly, we haven't seen since the protests of last January and February, since they ousted Hosni Mubarak on February 11th. The people thronging to Tahrir Square to announce that, in their opinion, this revolution is not yet complete.

(BEGIN VIDEOTAPE)

WATSON (voice-over): The revolution is back in Tahrir Square, if only for a day.

Nearly two months after their protests toppled a dictator, the crowds were back by the tens of thousands, singing and dancing to the music of a rebel song. The singer, himself, a symbol of the revolution.

Military police beat Rami Hasan (ph) to a pulp here last month, but now he's back on stage, repeating the call for revolution. The crowd, issuing a demand to Egypt's ruling military council that former president Hosni Mubarak must now stand trial.

ASSER HUSSAIN, PROTESTER: Of course we want Mubarak himself. When you make a revolution, you remove the head of corruption. We need to get to the head of corruption, and he was the one responsible for all the ministers, all the corruption that has been in this country for 30 years.

WATSON: People joined from across Egypt's diverse political spectrum, including the Muslim Brotherhood, which sat out previous protests.

And this Friday, a new addition. At least 15 army officers and soldiers in uniform, flouting a military order banning them from joining the protests. "If they want to execute us on charges of high treason," this officer says, "then they should come and execute us right here in front of the whole world."

A defiant challenge to the generals that now run the country issued by uniformed men now refusing to follow their army's orders.

(END VIDEOTAPE)

BLITZER: Ivan, the whole notion of the Egyptian military, at least some elements, protesting, defying orders, what should we read into that right now? What is going on in Egypt?

WATSON: Well, that's a pretty dangerous precedent, at least for chain of command in the Egyptian military, which has assumed both legislative and executive powers here in Egypt since Hosni Mubarak stepped down on February 11th. We could only see about 15 officers and soldiers in uniform, but they called on people in the crowd, in civilian clothes, military personnel, to raise their hands if they were there in the crowd, and dozens of men raised their hands.

This is a significant challenge to the authority of the Supreme Council of Armed Forces which is governing the country, and also to martial Mohamed Tantawi, the former defense minister, basically the top man in charge right now, the fact that not only were the tens and thousands of demonstrators denouncing him in the square today, but also some of his own mid-ranking officers. And a big question of where that's going to go for now.

Another point to bring out, Wolf, the demonstrators, thousands of them, are still in the square. They seemed to have blocked off some of the square from normal traffic, and it's a big question whether the military will try to break them up tonight after the curfew sets in at 2:00 a.m. local time here.

Potentially no one stands more to lose in a government shutdown than U.S. troops. We're hearing that families of U.S. service members killed in the line of duty won't receive death benefits if the government shuts down in about six hours.

(COMMERCIAL BREAK)

BLITZER: If the government does shut down a little more than six hours from now, U.S. troops may be hit the hardest.

Let's go to our Pentagon correspondent Chris Lawrence to explain.

What are the troops looking at, at midnight tonight, if the government -- and still a big "if"-- if the government shuts down?

CHRIS LAWRENCE, CNN PENTAGON CORRESPONDENT: Well, Wolf, we just got some new news that basically says midnight may not be the drop- dead date for troops. It's some good news for troops in that a senior defense official is now saying even if the government shuts down tonight at midnight, if for some reason Congress and the White House can work out some sort of deal by Tuesday, he thinks that Pentagon workers can work quickly enough to catch up so that next Friday, when troops get paid, they'll get their full check. In other words, they would never see a difference.

Even if it does last past Tuesday, the Pentagon is now working to fix the computer system and work out a way to create a special emergency pay date. That means even if troops got, say, a half a check next Friday, within a few days after that, if the government was back to work, they could conceivably get a special check to make up that difference -- Wolf.

BLITZER: One shocking aspects of this -- tell us what you know about it -- if somebody in the military dies in action, their family members are not going to be reimbursed to pay for their loved ones to be buried? Is that right?

LAWRENCE: Yes and no. It's a $100,000 death gratuity.

Basically, if anyone dies in the line of duty, it's a very quick payment. So, if a service member dies on, say, a Monday, that money gets to their family within, say, the next day. It's to handle these emergency sort of costs before some of the other life insurance and things like that kick in.

It's about $100,000 that they get. Well, the Pentagon can't legally pay out that money while the government is shut down, so those payments would be delayed. And that could cause some hardship for some families.

But life insurance would still go on. That's paid by a company, not by the federal government. And there are a number of aid agencies out there who are already working to try to fill in some of these gaps if the government does shut down.

BLITZER: Let's hope it doesn't shut down, Chris. Thanks very much.

It's not just the military. Federal employees across the country are concerned about their next paycheck. What are they doing about it?

Stand by.

(COMMERCIAL BREAK)

CASEY WIAN, CNN CORRESPONDENT: I'm Casey Wian at the Federal Building in Los Angeles, where hundreds of people have been lining up all day hoping to get their passport applications completed before a potential government shutdown at midnight Eastern Time tonight.

That's because passport service accepting extreme emergency cases will come to a halt if, in fact, there is a government shutdown. The U.S. Passport Agency processed about 14 million passports last year. That's 54,000 every day. So a lot of people clearly will be impacted.

Also impacted by this potential government shutdown, workers here. We spoke with one member of the federal police force who says he endured six weeks without a paycheck back in 1995, the last time there was a federal government shutdown. He's very concerned the same situation could happen again this time.